Over 1.6 million businesses owed more than $58 billion in unpaid federal payroll taxes, including interest and penalties, as of last September, according to a new report.
The report, from the Government Accountability Office, faulted the Internal Revenue Service for not aggressively pursuing businesses that have been lax in remitting the payroll taxes that fund Social Security and Medicare. "IRS's overall approach to collection focuses primarily on gaining voluntary compliance -- even for egregious payroll tax offenders -- a practice that can result in minimal or no actual collections for these offenders," said the report.
The IRS has some tools at its disposal for collecting the taxes, but they are not used enough, according to the report. "GAO found that tax liens were not filed against businesses with unpaid payroll taxes in over 30 percent of all payroll tax cases assigned to the field for collection effort," said Sen. Carl Levin, D-Mich., chairman of the Senate's Permanent Subcommittee on Investigations, which held a hearing in conjunction with the release of the report.
In addition to tax liens, the IRS can also file a Trust Fund Recovery Penalty to recover the missing money, Levin (pictured) noted. But the GAO determined that it took the IRS an average of 40 weeks to determine whether a TFRP should be assessed and then an additional 40 weeks to actually assess it.
Over a quarter of payroll taxes are owed by businesses with more than three years of unpaid payroll taxes. Some business owners repeatedly accumulated tax debt from multiple businesses. The IRS found over 1,500 individuals to be responsible for nonpayment of payroll taxes at three or more businesses, and 18 were responsible for not remitting payroll taxes at a dozen different businesses.
The report looked at 50 case studies of various businesses that had failed to remit their payroll taxes, many of which continued to pay their executives handsomely. In one case, a healthcare business that owes almost $2.5 million of unpaid payroll taxes repeatedly refused to remit withheld federal payroll taxes and the officers used the business to pay personal expenses. IRS records indicated the business's officers attempted to avoid paying taxes by filing Chapter 11 bankruptcy on three separate occasions, two of which were dismissed. Around the time of the bankruptcy filings, the officers withdrew about $700,000 of cash from the business. The IRS found three officers of the business to be willful and responsible for not remitting payroll taxes.
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